Midterm Chapter 1 - Study Bank

14) Everything else held constant, a rise in interest rates will cause spending on housing to ________. A) rise B) remain unchanged C) either rise, fall, or remain the same D) fall

D) fall

9) The term "bank" generally includes all of the following institutions except ________. A) chartered banks B) credit unions C) trust and mortgage loan companies D) finance companies

D) finance companies

4) Markets in which funds are transferred from those who do not have a productive use for them to those who do are called ________. A) commodity markets B) fund-available markets C) derivative exchange markets D) financial markets

D) financial markets

2) Well-functioning financial markets promote ________. A) inflation B) deflation C) unemployment D) economic growth

D) economic growth

31) What is a stock? How do stocks affect the economy?

A stock represents a share of ownership of a corporation, or a claim on a firm's earnings/assets. Stocks are part of wealth, and changes in their value affect people's willingness to spend. Changes in stock prices affect a firm's ability to raise funds, and thus their investment.

18) Countries with low inflation rates include ________. A) Canada, Sweden and the United States B) Canada, Ukraine and the United States C) Turkey, Ukraine and Zambia D) Turkey, Ukraine and Canada

A) Canada, Sweden and the United States

7) ________ theory relates changes in the quantity of money to changes in aggregate economic activity and the price level. A) Monetary B) Fiscal C) Financial D) Systemic

A) Monetary

8) A security is also known as ________. A) a financial instrument B) a contingent claim C) the interest rate D) a liability

A) a financial instrument

9) Inflation ________. A) can be explained by changes in the price level and money supply B) cannot be explained historically C) is unrelated to monetary variables D) changes in government policy

A) can be explained by changes in the price level and money supply

24) A budget ________ occurs when government expenditures exceed tax revenues for a particular time period. A) deficit B) surplus C) surge D) surfeit

A) deficit

15) High interest rates might ________ purchasing a house or car but at the same time high interest rates might ________ saving. A) discourage; encourage B) discourage; discourage C) encourage; encourage D) encourage; discourage

A) discourage; encourage

16) An increase in interest rates might ________ saving because more can be earned in interest income. A) encourage B) discourage C) disallow D) invalidate

A) encourage

17) Everything else held constant, an increase in interest rates on student loans ________. A) may increase the cost of education B) may reduce the cost of education C) has no effect on educational costs D) increases costs for students with no loans

A) may increase the cost of education

12) Compared to interest rates on long-term bonds, interest rates on three-month Treasury bills fluctuate ________ and are ________ on average. A) more; lower B) less; lower C) more; higher D) less; higher

A) more; lower

10) The average price of goods and services in the economy is called ________. A) the aggregate price level B) inflation C) interest rates D) deflation

A) the aggregate price level

17) Evidence from Canada and other foreign countries indicates that ________. A) there is a strong positive association between inflation and growth rate of money supply over long periods of time B) there is little support for the assertion that "inflation is always and everywhere a monetary phenomenon" C) countries with low monetary growth rates tend to experience higher rates of inflation, all else being constant D) money growth is clearly unrelated to inflation

A) there is a strong positive association between inflation and growth rate of money supply over long periods of time

25) Budget deficits can be a concern because they might ________. A) ultimately lead to higher inflation B) lead to lower interest rates C) lead to a slower rate of money growth D) lead to higher bond prices

A) ultimately lead to higher inflation

22) ________ policy involves decisions about government spending and taxation. A) Monetary B) Fiscal C) Risk Management D) Systemic

B) Fiscal

12) Which of the following is a true statement? A) Money or the money supply is defined as Bank of Canada notes. B) The average price of goods and services in an economy is called the aggregate price level. C) The inflation rate is measured as the rate of change in the federal government budget deficit. D) The aggregate price level is measured as the rate of change in the inflation rate.

B) The average price of goods and services in an economy is called the aggregate price level.

2) A financial crisis is ________. A) not possible in the modern financial environment B) a major disruption in the financial markets C) a feature of developing economies only D) typically followed by an economic boom

B) a major disruption in the financial markets

25) Changes in stock prices ________. A) do not affect people's wealth and their willingness to spend B) affect firms' decisions to sell stock to finance investment spending C) are predictable D) are unimportant to decision makers

B) affect firms' decisions to sell stock to finance investment spending

1) Money is defined as ________. A) bills of exchange B) anything that is generally accepted in payment for goods and services or in the repayment of debt C) a repository of spending power D) the unrecognized liability of governments

B) anything that is generally accepted in payment for goods and services or in the repayment of debt

6) Banks ________. A) are the smallest of the financial intermediaries B) are the largest financial intermediaries C) are barred from providing financial intermediation services D) can only provide services to corporations

B) are the largest financial intermediaries

7) Financial institutions that accept deposits and make loans include ________. A) exchanges B) banks C) over-the-counter markets D) finance companies

B) banks

3) Banks are important to the study of money and the economy because they ________. A) channel funds from investors to savers B) have been a source of rapid financial innovation C) are the only important financial institution in the US economy D) create inflation

B) have been a source of rapid financial innovation

4) During a recession, output declines resulting in ________. A) lower unemployment in the economy B) higher unemployment in the economy C) no impact on the unemployment in the economy D) higher wages for the workers

B) higher unemployment in the economy

16) There is a ________ association between inflation and the growth rate of money ________. A) positive; demand B) positive; supply C) negative; demand D) negative; supply

B) positive; supply

6) Poorly performing financial markets can be the cause of ________. A) wealth B) poverty C) financial stability D) financial expansion

B) poverty

19) Countries that experience very high rates of inflation may also have ________. A) balanced budgets B) rapidly growing money supplies C) falling money supplies D) constant money supplies

B) rapidly growing money supplies

3) Sustained downward movements in the business cycle are referred to as ________. A) inflation B) recessions C) economic recoveries D) expansions

B) recessions

22) The stock market is important because it is ________. A) where interest rates are determined B) the most widely followed financial market in the Canada C) where foreign exchange rates are determined D) the market where most borrowers get their funds

B) the most widely followed financial market in the Canada

20) In the 1970s, in Canada, interest rates trended upward. During this same time period, ________. A) the rate of money growth declined B) the rate of money growth increased C) the government budget deficit (expressed as a percentage of GNP) trended downward D) inflation fell

B) the rate of money growth increased

3) A key factor in producing high economic growth is ________. A) eliminating foreign trade B) well-functioning financial markets C) high interest rates D) stock market volatility

B) well-functioning financial markets

29) The S&P/TSX Composite reached a peak of over 14000 in 2008 and then fell by ________. A) 10% B) 30% C) 50% D) 70%

C) 50%

8) Which of the following are the largest financial intermediaries in the Canadian economy? A) Insurance companies B) Finance companies C) Banks D) Mutual funds

C) Banks

5) ________ markets transfer funds from people who do not have a productive use for them to people who do. A) Commodity B) Fund-available C) Financial D) Derivative exchange

C) Financial

5) Chartered banks, trust and mortgage loan companies, and credit unions and caisses populaires ________. A) no longer provide financial intermediation B) since deregulation now provide services only to small depositors C) accept deposits and make loans D) create fluctuations in the stock market

C) accept deposits and make loans

8) A sharp increase in the growth of the money supply is likely followed by ________. A) a recession B) a depression C) an increase in the inflation rate D) no change in the economy

C) an increase in the inflation rate

2) The upward and downward movement of aggregate output produced in the economy is referred to as the ________. A) roller coaster B) see saw C) business cycle D) shock wave

C) business cycle

19) A share of common stock is a claim on a corporation's ________. A) debt B) liabilities C) expenses D) earnings and assets

D) earnings and assets

1) Financial markets promote economic efficiency by ________. A) channelling funds from investors to savers B) creating inflation C) channelling funds to those who have a productive use for them D) reducing investment

C) channelling funds to those who have a productive use for them

20) Lower interest rates might cause a corporation to ________ building a new plant that would provide more jobs. A) complete B) postpone C) consider D) start

C) consider

4) Financial crises are characterized by ________. A) surging employment B) hyperinflation C) decline in asset prices D) high profits in the financial sector

C) decline in asset prices

10) The delivery of financial services electronically is called ________. A) e-business B) e-commerce C) e-finance D) e-possible

C) e-finance

24) Stock prices are ________. A) relatively stable trending upward at a steady pace B) relatively stable trending downward at a moderate rate C) extremely volatile D) unstable trending downward at a moderate rate

C) extremely volatile

1) Channelling funds from individuals with savings to those desiring funds when the saver does not purchase the borrower's security is known as ________. A) barter B) redistribution C) financial intermediation D) taxation

C) financial intermediation

28) Fluctuations in stock prices ________. A) have become less smaller since the year 2000 B) since the year 2000 are about the same as they were before the year 2000 C) have become more volatile since the year 2000 D) have been almost eliminated since the year 2000

C) have become more volatile since the year 2000

23) Stock prices, as measured by the S&P/TSX Composite Index, ________. A) have not changed much over time B) have risen smoothly over time C) have been extremely volatile over time D) have declined substantially since they peaked in the mid 1980s

C) have been extremely volatile over time

11) Financial innovation can lead to ________ and ________. A) phishing; financial gain B) higher interest rates; higher inflation C) higher profits; financial disasters D) lower interest rates; lower inflation

C) higher profits; financial disasters

11) The cost of borrowing is commonly referred to as the ________. A) inflation rate B) exchange rate C) interest rate D) aggregate price level

C) interest rate

18) A common stock ________. A) cannot be purchased by individuals B) is also known as a debt security C) is a share of ownership in a corporation D) is a claim on assets

C) is a share of ownership in a corporation

26) Budget deficits are important because deficits ________. A) cause bank failures B) always cause interest rates to fall C) may lead to a financial crisis D) always cause prices to fall

C) may lead to a financial crisis

14) From 1968-2014 the price level in Canada increased more than ________. A) twofold B) threefold C) sixfold D) ninefold

C) sixfold

26) A ________ is an example of a security, which is a claim on future income or ________. A) bond; interest rate B) bond; debt C) stock; assets D) stock; debt

C) stock; assets

23) When tax revenues are greater than government expenditures, the government has a budget ________. A) crisis B) deficit C) surplus D) revision

C) surplus

5) Prior to all recessions, there has been a drop in ________. A) inflation B) the money stock C) the rate of money growth D) interest rates

C) the rate of money growth

7) The bond markets are important because they are ________. A) easily the most widely followed financial markets in Canada B) the markets where foreign exchange rates are determined C) where corporations and governments borrow to finance their activities D) the markets where all borrowers get their funds

C) where corporations and governments borrow to finance their activities

27) On ________, October 19, 1987, the market experienced its worst one-day drop in its entire history with the S&P/TSX Composite falling by 11 percent. A) "Terrible Tuesday" B) "Woeful Wednesday" C) "Freaky Friday" D) "Black Monday"

D) "Black Monday"

21) Bonds of different maturities ________. A) show no common features B) have interest rates that tend to move together C) have interest rates that can differ substantially D) B and C only

D) B and C only

11) It is true that inflation is a ________. A) continual increase in the money supply B) continuous fall in prices C) decline in interest rates D) continual increase in the price level

D) continual increase in the price level

13) The interest rate on long-term corporate bonds is ________, on average, than other interest rates. The spread between it an other rates ________ over time. A) lower; remains constant B) lower; fluctuates C) higher; remains constant D) higher; fluctuates

D) higher; fluctuates

10) The fluctuation of interest rates ________. A) never occurs because the central bank is involved in setting the rate B) is due to changes in stock prices C) cannot occur because there is only one interest rate D) impacts all Canadians

D) impacts all Canadians

9) A bond is ________ A) not as good as investment as stocks B) pays interest sporadically C) never pays interest D) makes payments periodically for a specified period of time

D) makes payments periodically for a specified period of time

15) Complete Milton Friedman's famous statement, "Inflation is always and everywhere a ________ phenomenon." A) recessionary B) discretionary C) repressionary D) monetary

D) monetary

21) The management of money and interest rates is called ________ policy and is conducted by a nation's ________ bank. A) debt; superior B) fiscal; superior C) fiscal; central D) monetary; central

D) monetary; central

6) Evidence from business cycle fluctuations in Canada indicates that ________. A) a negative relationship between money growth and general economic activity exists B) recessions have been preceded by declines in share prices on the stock exchange C) recessions have been preceded by dollar depreciation D) recessions have been preceded by a decline in the growth rate of money

D) recessions have been preceded by a decline in the growth rate of money

13) If ten years ago the prices of the items bought last month by the average consumer would have been much lower, then one can likely conclude that ________. A) the aggregate price level has declined during this ten-year period B) the average inflation rate for this ten-year period has been positive C) the average rate of money growth for this ten-year period has been positive D) the aggregate price level has risen during this ten-year period

D) the aggregate price level has risen during this ten-year period

27) What happens to economic growth and unemployment during a business cycle recession? What is the relationship between the money growth rate and a business cycle recession?

During a recession, output declines and unemployment increases. Prior to every recession in Canada the money growth rate has declined, however, not every decline is followed by a recession.

13) Why is the study of financial innovation important?

Financial innovation shows how creative thinking on the part of financial institutions can lead to higher profits.

12) What crucial role do financial intermediaries perform in an economy?

Financial intermediaries borrow funds from people who have saved and make loans to other individuals and businesses and thus improve the efficiency of the economy.

30) Why is it important to understand the bond market?

The bond market supports economic activity by enabling the government and corporations to borrow to undertake their projects and it is the market where interest rates are determined.

28) Describe the relationship between the aggregate price level and the growth rate in money supply. Can the relationship be used to explain inflation?

The price level and the money supply generally move closely together. There is a positive relationship between inflation and the growth rate of the money supply. Friedman says that "inflation is always and everywhere a monetary phenomenon."